How to win during earnings season

Earnings season is usually the most predictably volatile time in the financial markets.  This volatility means movement, usually big swings up or down and those big swings mean big money if you pick right.

For those that don’t know what earnings season is, earnings season is when publicly traded companies publish their profits and losses for the three months prior sales and operations.  What makes for the volatility is the guess work that goes into this.

Based on the efficient market theory, all public information is priced/baked into the stock. Analysts then publish earnings forecasts essentially guessing how well the company will do using data and past performance.  Companies are then judged by whether they beat those estimates and also judged on whether they beat the results of the same quarter in the prior year.  The efficient market then adjusts to the newly released published information.

Here are a four ways I try to predict which way a stock is going to turn to make money during earnings season.

Do your homework

Part of investing is homework.  You should be doing at least an hour worth of reading and research for every stock you hold.  We don’t buy and hold we buy and homework.  This homework should include reading both the good and bad articles as they pertain to your holdings. You should try to read at least one investment article each day. This will help you make money but it will also help you learn.

You should also be looking at the earnings for the prior year but the same quarter.  This is important because judging it by the prior quarter can give you an error based on seasonality.

When you are reading the articles and listening to podcasts what you want to look for is the overall sentiment.  Are there more negative articles than positive ones? Is the data compelling? Are you starting to hear the same thing over and over again?

When reading these articles you have to keep in mind that people make money whether stocks go up or down.  Therefore, someone could have a bearish take on a stock with a short position. Savvy investors make money in every market. So to overcome this bias you need to read a lot, not just a few articles and you need to also compare to your own research and feelings. Start watching CNBC and less Netflix or whatever people watch these days. IDK because I’m always too busy.

Another thing to be aware of is that most of these analysts are highly niched.  This means that their day job is analyzing the ONE stock you are investing in.  This elevates the level of their opinion but still they are just guessing.  Take that educated guess work with a grain of salt because nobody REALLY knows which way the market will go.

Lastly, keep in mind that if you are betting on emerging tech, emerging industries or emerging companies that most people want to preserve the status quo.  Their fear of the unknown can influence their opinions.  The key is to read a ton and listen to a ton so you are at least making an educated and informed guess not simply throwing darts at a board.

Watch the chart

Earnings is a short term technical analysis type play.  Fundamentals impact it but most of what happens is determined by the chart.  What I like to look at is the overall trend of the company.  This momentum pre earnings is usually a good indicator that the stock is going to keep doing what it has always been doing. As Al Pickett says, what goes up tends to continue to go up and what goes down continues to go down.

What I like to do is also look for tops and bottoms.  Sometimes a stock can get a little toppy (Netflix) and indicate that it is overvalued and due for a pull back.  Sometimes a stock can get beaten down so bad that it can’t possibly get any worse.  This is what happened with Chipotle.  Netflix won because winners win and Chipotle won because their punishment was a little harsh.  The system isn’t perfect but it does help you spot opportunities.  Netflix is likely still due for a pull back.

Another indicator on a stock is to judge what it does pre earnings. If a stock has a huge run into earnings they sometimes are based on high hopes for earnings. This can mean that no matter what happens you will be disappointed. Earnings will meet expectations, miss expectations or do nothing at all.  All of which can be detrimental to a position because it had such a huge run heading into the day that whatever presented itself was a let down. If a company does well heading into earnings that usually all the money you are going to make.

On the other hand, if a company is getting hammered pre-earnings its possible that the market was over reacting. When earnings are better than the pessimists projected you can see a good win on the upside as it reverses.   Watch the chart and learn the trends.

52 week high and low

Another pretty simplistic way of gauging how well a stock will perform at earnings is looking where the company is based on their 52 week high and 52 week low. This basically shows how cheap the stock was in one year and how expensive it was.

Now this can go multiple ways. If you are making a value play, buying at the low can be great.  If you are making a value play buying a company setting new highs can be catastrophic if the stuff hits the fan.

The 52 week high ties in the Al Picket rule.  If a company is setting new low after new low its probably just something to short or avoid.  If a company is setting high after aggressive high its probably better to buy Amazon I mean that company.

Use these tools combined to get to an answer don’t use one in isolation.

Be a student of the stock

Lastly, be a student of what you are buying. Know its price movements, know its tendencies, know its range so you can know what you are getting into. When I bought UAA options at 17 when the stock was trading around 15 it was because I knew UAA was trading in a 15-17 up and down pattern. I have been watching the company for so long that I knew it was inevitable that it would return and push through the $17 mark.

You have to know your company well enough to know what number makes sense down to the penny.  Don’t merely buy and pray, buy and be proactive.  Read everything you can, learn everything you can, watch and put as much effort into your investments as you put into your job.  Everyone wants passive income but that is only for the really poor (welfare) or the really well off.  If you are in the middle (class) you need to get as active with your income as you can until your money allows you to be passive.

If you are interested in joining any of our clubs and making a difference in your community, email info@capitaltodd.com if you haven’t yet done your taxes or haven’t created an LLC to organize your hustle, do so now! Email charles@capitaltodd.com today!

Be great and invest well!

Todd Millionaire

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